Research on Chinese Enterprise Technological Innovation and Product Competitiveness

Abstract: This study aims to investigate the influence of product competitiveness on the technological innovation in Chinese enterprises. The investigation starts from micro-level enterprises and the samples comes from the nonfinancial sectors of Shanghai and Shenzhen listed companies during 2002-2012. Novel simultaneous equations have been established based on the Hausman simultaneous test analysis to examine whether there is endogenous between innovation and competition and also test the bidirectional relationship of product market competition and enterprise innovation. The analysis results show that excessive competition would dampen the enthusiasm of innovation and influence the improvement of enterprise technological innovation. Excessive monopoly makes the companies generate a scene of complacency and reduces technological innovation. Therefore, there exists U-shipped relationship between product competition and enterprise technological innovation. In addition, variables about enterprise characteristics and governance also show influence on the technological innovation. Based on the above conclusions, some recommendations have been proposed to improve the technological innovation of Chinese listed companies. Keywords: Chinese listed companies, product-market competition, technological innovation59523

INTRODUCTION 

More than 30 years since China’s reform and opening-up, China’s economy has experienced highspeed development. The society is at its transformation phase. The economy structure and the industry are urgent for upgrade, for which self-innovation will be the core impulse (Romer, 1986; Lucas, 1988). With macro aspects of the economic, technology is the main motivation of economy development (Cooper, 1976). From the micro aspects, technological innovation has become the key source of competitiveness improvement and competition advantage. Since Joseph Schumpeter proposed the innovation theory, scholars have undertaken many researches about the factors that may affect the enterprise technological innovation. The fiercest domain is the relationship of innovation and competition and they have not reached a unanimous conclusion. Then, in China, how does product-market competition affect the enterprise technological innovation? Though Chinese scholars have done researches about this question, the researchers can not completely describe the influence, for the lack of data and single-faceted research about the industry but not micro companies. For this reason, this study is indented to take advantage of the sample of Shanghai and Shenzhen listed companies during 2002-2010 and analyze the relation of product-market enterprise technological innovation through regression analysis. During the research, Herfindahl-Hirschman Index (HHI) is used to measure product-market competition and the strength of Research and Development (R&D) is used to measure technological innovation. This study will enrich the research of Chinese listed companies’ market structure and technological innovation and propose some political suggestions to reform marketing competition environment for the sick of technological innovation development. Compared with existing researches, this study shows the following notable characteristics: 

• Data from micro listed companies 

• Large amount of samples 

• Wide ranges of industries

 • Enterprise governance variables are introduced as control variables for empirical analysis

LITERATURE REVIEW

 Since Schumpeter (1942) put forward innovation theory, the relation between competition and innovation has attracted much attention and scholars from many countries conduct large amount of theoretical analysis and empirical test. But until now, no consistent conclusion is gained. The existing researches can be pided into three parts according to the conclusions: irstly, monopoly is in favor of innovation (there is a negative correlation between competition and innovation); secondly, perfect competition is beneficial to innovation (there is a positive correlation between competition and innovation); thirdly, moderate competition is helpful to innovation (there is an inverse U shape between innovation and competition). Theoretically, Schumpeter believes that monopoly is good to innovation, as in monopoly market, enterprises can gain more from innovation. Gilbert and Newbery (1982) built a patent competition model, to state that monopoly enterprises gain more motivation to do technological innovation than ordinary enterprises. Arrow (1962) compared the potential incomes under the market structure of monopoly and competitive and discovered that enterprises in competitive market get more from technological innovation than that in monopoly market, so he came to the conclusion that completely competition is in favor of innovation. Scherer (1980) considered that monopoly will impulse the laziness of the managers and make them unwilling to conduct technological innovation. While the increased competition will reduce the shirking behaviors and motivate the managers to improve technological innovation, lower the costs and increase the profits. Poter (1990) indicated that fierce competition will compel the companies to implement innovation for the purpose of survival, which will also improve the development of economy. Densetz (1969) improved the assumption of Arrow model and proves that the inverse U shape is existed. The market that between completely competition and completely monopoly is best for innovation. On one hand, excessive competition would dampen the enthusiasm of innovation; on the other hand, excessive monopoly makes the companies generate a scene of complacency and reduce technological innovation (Densetz, 1969).